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What is a Fiduciary Duty?

What is a Fiduciary Duty?

Are you a business owner, a trustee, or an agent? If so, you need to know what a fiduciary duty is.

7th February 2019

Similar to the pet name Fido, ‘fiduciary’ denotes a relationship of trust. But instead of existing between a human and a canine, fiduciary relationships typically exist between humans exclusively. In these types of relationships, legal obligations exist in the form of ‘fiduciary duties’.

But how can this affect you? To answer this question, this article will explain three key things: what a fiduciary duty is, when it typically exists, and what happens in the case of a breach.

Overview of Fiduciary Duties

A fiduciary relationship typically exists when one party (the ‘fiduciary’) undertakes to act for another (the ‘principal’), and in doing so, must prioritise the principal’s interests over their own. The responsibility to act in the principal’s best interests then forms the basis of the fiduciary’s duties or obligations, which are enforceable by a Court.

The exact nature and extent of the duty or responsibilities undertaken by the fiduciary will vary depending on individual circumstances, such as the terms of any arrangement or contract entered into with the principal. However, a crucial aspect of all fiduciary relationships is that the fiduciary must not act against the interest of the principal. This commonly gives rise to basic fiduciary obligations to not:

  • Allow a conflict between duties to the principal and the fiduciary’s interests
  • Make a profit out of the principal’s trust
  • Act for their own benefit or a third party’s benefit, without the principal’s consent

Relationships Creating Fiduciary Duties

There are numerous categories of relationships which are generally recognised by courts to create fiduciary duties and those that usually do not. However, a finding of such relationships ultimately depends on whether or not the principal has a reasonable expectation that the fiduciary will put the principal’s interests first, given the circumstances. For example, a fiduciary relationship is more likely to be found where trust and confidence exist between both parties, as opposed to an arm’s length relationship.

Relationships which often give rise to fiduciary obligations include:

Relationships which generally do not give rise to fiduciary obligations include:

  • Parties to a commercial relationship
  • Manufacturer and distributor
  • Bailor and bailee
  • Licensor and licensee
  • Banker and customer
  • Recipient of a sum of money paid by mistake and payor

Breach of Fiduciary Duties

Unintentionally or not, fiduciaries may breach their duties to the principal over the course of their relationship.

In some circumstances, fiduciaries may be able to defend the breach in court. For example, they could argue their actions were permissible on the basis that full disclosure to and informed consent from the principal was made beforehand. Alternatively, an exclusion clause in a contract between the parties may also justify the conduct.

In other cases, the principal can seek court remedies. This may include the imposition of a constructive trust, account of profits, or equitable compensation.

Conclusion

A fiduciary duty is essentially the obligation to act in someone else’s interest over your own. Such duties will commonly arise from relationships including solicitor-client, director-company, and trustee-beneficiary relationships. However, the existence and scope of these duties can vary significantly based on the unique circumstances of the case.

For full advice on whether you owe or are owed fiduciary obligations, you may wish to consult a specialised lawyer on the matter.

Have more questions? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.

 

Author
Jaclyn Ling

Jaclyn is a Legal Intern at Lawpath as part of the content team, with a keen interest in how technology can improve accessibility to the legal services industry. She is currently studying a Bachelor of Commerce (Professional Accounting) and a Bachelor of Laws at Macquarie University.